While the mortgage industry debates the future of Fannie Mae and Freddie Mac under the incoming Trump administration, the Congressional Budget Office (CBO) released a study on Friday suggesting that a recapitalization of the government-sponsored enterprises (GSEs) could benefit the U.S. Department of the Treasury in most scenarios.
This follows a separate CBO study from Thursday, which found that the federal government could save $14.7 billion by extending an addition to guarantee fees and imposing stricter limits on conforming loan purchase baseline limits, which have been rising since 2016.
In a review of a 2020 analysis, the nonpartisan CBO concluded that under current conditions, the GSEs would raise funds to repay the Treasury’s ownership stake in Fannie and Freddie in nearly 60% of the 250 scenarios considered. By contrast, in 2020, this outcome occurred in only 12% of scenarios.
The updated analysis, which examined the possibility of recapitalizing the GSEs through administrative actions, was requested by Rep. Patrick McHenry, the outgoing chairman of the House Financial Services Committee.
The scenarios considered include the GSEs retaining profits for an initial period of three or five years before selling their common stock to investors in order to replace the Treasury’s estimated $190 billion ownership stake. The Treasury’s warrants, which grant it the rights (but not the obligation) to buy common stocks for a nominal price in the future, expire on September 7, 2028.
The report evaluates factors such as the recapitalization period, capital requirements, earnings growth rate and shareholders’ value estimates. But much has changed since the initial analysis in 2020.
In December 2019, Fannie Mae and Freddie Mac reported $24 billion in capital, equating to 0.4% of their $5.7 trillion in total assets. By December 2023, their capital had grown to $125 billion, or 1.6% of their $7.6 trillion in assets.
The growth in assets and income exceeded the assumptions made in the CBO’s 2020 analysis, largely due to rising home prices. The increase in home values boosted the principal balances of mortgages guaranteed by the GSEs through their mortgage-backed securities and enhanced their overall financial performance.
“The potential value of the GSEs to investors is greater now than it was at the time of the previous analysis, resulting in more scenarios in which the GSEs could be recapitalized through the sale of common stock and could repay the Treasury for its stake in the enterprises,” the CBO report states.
Changes to conforming limits
In a separate study released Thursday, the CBO reported that under current law, the costs of the mortgage guarantees provided by the GSEs are projected to exceed the fees they collect.
The GSEs operate by purchasing mortgages from lenders, pooling them into mortgage-backed securities (MBS) and selling them to investors while guaranteeing them against losses from defaults in exchange for a fee.
To address this financial gap, the CBO recommended extending for two more years — until 2034 — the additional charge of 10 basis points per year, which is remitted to the Treasury as part of the GSEs’ guarantee fees. This would maintain the fee at an average of 58 basis points, consistent with its projected level in 2025.
A second proposed alternative involves eliminating the higher conforming loan limit in high-cost areas and capping the ceiling at $691,800 — approximately 10% higher than the maximum limit — for other areas.
Late last month, the Federal Housing Finance Agency (FHFA) set a new baseline conforming loan limit of $806,500 for one-unit properties in 2025. For areas where 115% of the local median home value exceeds this baseline limit, the Housing and Economic Recovery Act (HERA) establishes the ceiling at 150% of the baseline limit. Ultimately, the high-cost loan limit for one-unit properties next year will be $1,209,750.
Extending the guarantee fees’ additional basis points and reducing the conforming limits could save the government $14.7 billion from 2025 to 2034, the CBO estimates.
